PART I – OPEN ITEMS
01/20. Declarations of Interest
- A. Allen declared a Standing Interest as an employee of Harper Adams University.
- R. Heath declared a Standing Interest as an employee of Harper Adams University.
02/20. Chair’s Announcements
The Board Chair announced that, due to the flooding affecting Shrewsbury and in light of the Severe threat to life warning issued by the EHA and the closure of roads in the town centre, and after having conducted thorough risk assessments, the decision had been taken to close the English and Welsh Bridge campuses from Monday, 24 February to date and including Wednesday, 26 February 2020. The decision for Thursday 27 February, would be taken on Wednesday 26 February. The Principal/CEO praised the hard work of those of the estate’s team involved in managing the impact of the flood.
03/20. Shrewsbury College’s Group Integrated Financial Plan 2019-20 to 2021-22 (Appendices – Agenda Item 4)
The Finance Director explained that the Board was required to consider and approve the College’s Integrated Financial Model (IFM) and supporting commentary (both previously circulated) for submission to the Education & Skills Funding Agency (ESFA). The IFM will replace a number of ESFA returns previously provided and now required:
The prior year outturn (for the year ending 31 July 2019 - i.e. the equivalent of the old College Finance Record);
2. Forecasts for the current year outturn, and two subsequent financial years
a. Forecast for the year ending 31 July 2020, broken down into
i. actuals – period 1 August 2019 to 30 November 2019; and
ii. forecast – period 1 December 2019 to 31 July 2020;
3. Forecast – year ending 31 July 2021; and
4. Forecast – year ending 31 July 2022.
The new IFM also required Forecast Income and Expenditure, Forecast Cashflow and certain Balance sheet information to be analysed and input into the ESFA prescribed format for each of the 36 months covered by the Return.
Corporations must now also submit a comprehensive supporting commentary with the IFM, to include:
- a summary of the corporation’s strategic objectives;
- a description of how the IFM is consistent with the corporation’s strategic objectives;
- explanations for significant year-on-year movements in the statement of comprehensive income and balance sheet;
- explanations for significant variances between the estimated outturn for the current year and the original budget;
- a summary of how risks to cash flow insolvency have been managed and mitigated
- the contribution made by all areas of material activity;
- how the corporation plans to service its debt and finance its capital projects; and
- sufficient and relevant evidence to support any request to moderate a financial health autograde of ‘inadequate’ (not applicable in the College’s case).
The Finance Director confirmed that the College would also continue with its existing budgeting and planning in addition to completing the IFM. The Board AGREED that to ensure that the budget for each coming year was as accurate and informed as possible, the College would continue to set its annual Budget and financial plans as part of its normal annual budget cycle running from February to May and seek approval for the budget from the Board in July of each year. The Board noted that, as a result, the Forecasts set out in the IFM would be subject to change and the final Budgets proposed for 2020-21 or 2021-22 may vary from these forecasts.
The Board Chair sought assurance that the narrative report presented by the Finance Director was a correct representation of the Financial Model Return required by the ESFA. This was confirmed by the Finance Director.
The Board accordingly, reviewed the narrative report, including -
- The College’s strategic and financial objectives set out as part of the 2019-20 budget setting process;
- How the IFM forecasts met the College’s financial objectives. It was noted that the IFM was consistent with the College’s strategic objectives. However, the Board noted that the key areas of risk were, with forecast pay cost pressures and without further increases in the funding rate, whether the College would be able to invest sufficiently in quality improvement and staff development, and to ensure the College’s estate would be outstanding for all our students and be an outstanding place to work for all our staff. The Board noted the risk in the 2021-22 forecast that the College may not generate sufficient cash to continue to invest in its buildings and equipment to deliver the goal of providing an outstanding environment. The Board challenged that the assumptions set out with respect to 2021 – 22 forecast considered the possible negative impact of the recent Ofsted Inspection and consequent impact on reputation and enrolment.
- 2019-20 Forecast vs Budget. The Forecast outturn did not anticipate a significant variance from budget EBITDA. Detailed variance analysis would continue to be provided in the Monthly Management Accounts.
- Cashflow risks, debt servicing and funding of capital projects. An Overdraft facility had been put in place to cover the low cash point forecast for March and April 2020. Capital expenditure had been planned to accommodate cashflow risks and long-term threats forecast to arise from reduced 16-18 funding in 2021-22, following an anticipated fall in enrolments in September 2020. The Forecast had also been modelled against the College’s debt covenants and enough headroom allowed for to ensure that the College meets all its covenants.
- Summary and Key Assumptions.
- 2020-21 funding was expected to increase based on higher R04 actual headcount. Core 16-19 funding had been estimated using ESFA published rates and funding factors in advance of ESFA confirmation expected in March 2020. Capacity and Delivery Funding had been assumed to be discontinued from July 2020, as a result of the potential for an adverse Ofsted grade.
- 2021-22 funding was planned to reduce in line with anticipated student enrolments in September 2020. Modelling had been based on median projections from current applications and historic patterns of further applications and enrolments, significantly discounted to take account of the eventual outcome of the College’s recent Ofsted inspection and/or any reputational damage which may have already been caused by press coverage or ongoing strike action at the College by the NEU over sixth form pay and funding of the sector.
- Total Apprenticeship funding. In response to a challenge (actually a question from Roger) on the basis of the forecast assumptions, it was explained that 2020-21 funding was expected to increase due to the high carry –in value of 2019-20 enrolments and modest continued expansion of the College’s Engineering and Motor Vehicle in line with the opportunities from the new LEP project, that was to meet the existing demand which cannot currently be accommodated. There was a high level of confidence in this growth, as well as other opportunities presented by working closely with large levy-paying employers. 2021-22 funding was planned to reduce slightly as a consequence of declining enrolments if the adverse overall Ofsted grade was confirmed, though it was noted that the likely outcome for apprenticeships would be positive. There was also an expectation that the number of non-levy apprenticeships would decline due to the new funding methodologies introduced by ESFA and an unwillingness of employers to engage.
- Total AEB Funding. 2019-20, 2020-21 and 2021 – 22. In addition to reduction in 2020-21, it was modelled that the existing GLA allocation to colleges outside of the London fringe area would reduce, on the assumption that the GLA rejected the college business case for continued funding for specialist, high quality, niche provision. If the case was accepted the financial position in 2021-22 would improve.
- Advanced Learner Loans were assumed to remain steady.
- Total OfS HE funding 2019-20, 2020-21 and 2021 – 22. The Board challenged the basis for this and it was explained that assumptions were cautious to reflect changes in provision and to mitigate against the impact of increases in OfS costs. The Principal/CEO explained that the assumptions were based on a low starting-point, given that, in 2018 – 2019, HE income was over £900k. The current full year-end reflected reduced HE activity and the 2020 – 2021 Financial Pan therefore assumed modest growth from this lower base.
- Total FE Funding was assumed to remain flat in 2020-21 and reduce in 20201-22. The Board Chair challenged the basis for these assumptions and it was explained that demand for specific full costs electrical courses was expected to decrease as the numbers of electricians requiring retesting falls following eighteen months of activity.
- EU Funding. Forecast funding comprised the existing Erasmus KA2 Youth offender learning grant income, due to run until 2021-22. Forecasts assumed the College’s latest bid would be unsuccessful; however, the College had the Erasmus+ VET Mobility Charter and an excellent track record in winning funding. Therefore, there was the potential for additional income.
- Other Income. Excluding the impact of the Teachers’ pension grant, income from these sources was assumed to remain even over the forecast period.
- Staff Costs (excl. restructuring) 2019-20, 2020-21 and 2021 – 22. It was noted that 2019-20 pay forecast was based on a 1.5% budget pay increase and expected increased support costs due to the in-year growth in High Needs income in excess of budgeted levels.
- Total Staff Restructuring Costs 2019-20, 2020-21 and 2021 – 22.
- Total Other operating expenditure 2019-20, 2020-21 and 2021 – 22.
- Capital Expenditure. Assumptions allowed greater capital expenditure in 2020-21, with a return to lower levels of expenditure in 2021-22, reflecting the lower forecast EBITDA.
- Loans & Borrowing. The IFM assumed no new borrowing with regular repayments and servicing of existing loans over the life of the loan.
- Forecast Financial Health. The College self-assessed as “Good” rather than “Outstanding” for FY21 in recognition of the forecast drop in student numbers and resulting drop in EBITDA anticipated in FY22. The College considered it inappropriate to self-assess financial health as Outstanding given the significant forecast reduction in EBITDA the following year.
The Board was also advised of error flags in the IFM and other key differences with the College’s published accounts, although, in total, they agreed. The Finance Director explained that the reasons were set out in the Model Commentary to be submitted to the ESFA.
In answer to a query, the Finance Director confirmed that the IFM included the assumed student funding rate increases; the biggest variable being the number of forecast students.
The Principal/CEO suggested that the issue for governors was to have confidence in the assumptions that underpinned projected income and that the IFM indicated sustainable cash flow.
On discussing the intention behind the introduction of the IFM, it was suggested that the ESFA was expected to use returns as an indicator of colleges’ underlying financial stability. The return needed to be suitably scrutinised by the Board of Governors to ensure effective and robust governance and financial oversight.
The Board Chair challenged how the assumptions in the IFM would meet the College’s strategic goals. The Finance Director explained that the College’s Return was prudent in its assumptions, with reduced capital expenditure in 2021-22 and anticipating a positive cash position as a result. The Finance Director confirmed that, whilst the College was planning to invest where the Budget allowed, the amount of capital held by the College and the known level of required works on infrastructure maintenance to the current campuses was likely to compromise the College’s ability to invest in student experience. The Board Chair requested that this be discussed at the strategy planning meeting.
The Board Chair challenged if enough funding had been modelled for restructuring costs, based on the projections for an anticipated reduction in student enrolments. The Finance Director explained the rationale behind the modelling, including seeking operational efficiencies from 2019 – 20, to reduce the impact of possible restructuring and redundancies. To date, the College had managed staffing efficiently using a variety of strategies, such as fixed-term contracts.
The Board Chair expressed his thanks to the Finance Director and his staff for completing the complex document that had gone through six versions, to meet the required deadline.
Having reviewed and assessed the IFM and being satisfied that the Return represented a prudent forecast, it was –
Resolved: that the College’s Integrated Financial Model be submitted to the Education & Skills Finding Body.
04/20. Date of Next Meeting – 30 March 2020. Venue – H.E. Centre, London Road Campus.
The meeting concluded at 5.43 p.m.